In a recent op-ed, inspired by the wave of male-tinged scandals, David Weidner observes that women are just better at most things, not just investing. As a woman, I’m more than happy to applaud that statement – but as a psychologist, I’d like to delve a little more deeply into the issue at hand, financial investment and risk-taking, to see what it is that is actually underlying superior market performance, and what everyone—men and women alike—can learn from those factors.

Is it a simple case of risk-taking?

No. To focus exclusively on risk-taking would be myopic. Yes, it’s true that risk-taking is a big factor in the picture, and women on the whole have been shown to be more risk-averse than men. Why? The greatest culprit, according to researchers, is testosterone. Women have less of it, men have more of it, and biology, in this instance, does matter. But that’s far from the whole story – and, actually, far from the wholly accurate story.

As I noted in a prior post on testosterone, the relationship between testosterone and risk-taking is a U-shaped one, not a linear one. Both very high and very low levels lead to increased risk-taking. And there are men and women who fall into both categories. Indeed, while risk-taking gender differences are well accepted and well documented, one finding tends to get short shrift: the differences within a gender are far greater—and regularly and reliably so—than are differences between genders. What does that mean? Women differ more from other women than they differ from men; and men differ more from other men than they differ from women.

Moreover, when it comes to investing, the environment and the end goals matter. Less risk-taking does not equal better investing, nor does great risk-taking equal worse investing. It all depends – on the markets, on the investments, on the strategic considerations. So even if we accept without question that women take fewer risks than do men, and forget that this assumption is itself problematic, that would still not explain why women are often more successful investors.

What is the underlying investment approach?

I would argue that there is another underlying issue here, one that is often mistakenly conflated with risk-taking: self-control, or self-regulation. How well are you able to monitor your own internal states, emotions, and reactions – and to then translate that self-monitoring into action, either by doing something or by not doing something, depending on the situation?

There are two often repeated truisms in the world of investing: people who don’t perform as well tend to sell too early or hold too long. In other words, they panic when everyone else panics, and sell instead of riding out the wave of negativity (hence panic waves); or, they join in the wave of optimism, and continue to hold assets that slowly become overvalued, instead of selling them before the value implodes (hence bubbles). And the funny thing is, people continue to do one or both of these things even if they are well aware of the phenomena – because that doesn’t apply to me. I only sell because I know it’s going to get worse, so I am just cutting my losses. I only hold because I know it’s going to get better, so I’m just holding out for more gains. But is that certainty the result of actually logic, or of something more emotional and less rational?

Why and how self-control matters

Here is where self-control—and the female, or “good investor,” irrespective of gender, advantage—comes into play. A more successful investor is someone who is able to navigate the myriad influences that emotion has on our decision making without our ever being aware of its impact.

So, what does that mean in practice?

(1) Identify accurately and in a timely manner what you are thinking and feeling internally. This is far from being as simple or as tautological as it sounds. People are remarkably bad at identifying and monitoring their internal states – and men, more so, on the whole, than women. But if you don’t have this first step, you may not realize if and when you should be exercising self-control. You may not see that you’re acting out of emotion, and not out of logic, that your “hot,” go system has overridden your “cool,” know system. You might, in other words, think that your exuberance is perfectly rational (and on the flip side, your despondence perfectly justified)

(2) Place your feelings in an appropriate context. After you successfully identify your internal state, ask yourself: why am I feeling this way, or thinking along these lines? What is it that has triggered it? And given that trigger, is the internal state still justified? That last point bears note – emotion isn’t always bad. In fact, it can lead to better decisions. What is bad is emotion that is not properly identified for what it is and attributed to its proper cause. Accurate attribution and analysis is crucial. It will help you know when to follow your “gut” and when your gut is simply leading you astray.

(3) Reassess in light of the situation: “cool” yourself. In laboratory self-regulation instruction, when participants are taught to manage negative affective states (though in investing, the positive ones often need management, too), this is known as reappraisal. How can I view whatever the situation happens to be in a different light – and what does that mean for how I should act? I may need to up-regulate my positive emotion (focus on the positive and override the desire to dwell on the salient negative and act irrationally as a result). Or, I may need to down-regulate my negative emotions (downplay the salient negative, by understanding why it might not be as negative as it appears). Or, I may need to distance myself from the situation and take a more objective, third party approach. What would I say to myself if I weren’t directly involved, but were merely a bystander observing a given scenario? What advice would I give? Whichever strategy works best for a given situation, the main thing is to “cool” yourself, to help your more logic-based system take hold and your emotional one to take a step back.

(4) Act accordingly. Now, decide what the best course of action is. Not before. And yes, this might mean holding on to an investment when every intuition says sell, or letting go of it, when everything within you screams hold.

If investors take that approach to their own decisions, and don’t wave it off dismissively as inapplicable to them personally, or as just some psychological bs from people who don’t know anything about the markets, I think many more, both men and women, would begin to act like the ideal female investor, with far better consequences for everyone involved. And that holds for other areas of life, too. After all, we’re always investing in something.

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